Nationalization may be passé, but confiscation is not. Foreign corporations are no longer considered necessary to economic growth in emerging markets and are not welcome
When I was growing up in the 50s and 60s we had third world countries. Many of these countries had just won their independence from their colonial masters. Independence movements were often led by idealistic leaders inspired by the communist revolutions in other countries. These young nations had just rid themselves of a society made up of natives and masters. The humiliation of this two-tiered system made the attraction of socialism with equal division of wealth irresistible. Sadly it didn’t work.
New countries without reliable institutions are inherently unstable. To solidify gains, leaders empowered a new class of elites, loyal only to the new regime. In countries that were supposed to be ruled with egalitarian ideals, all citizens were equal, but some citizens became more equal than others. Like all other elites before them, this new class armed with the tools of an increasingly bureaucratic state went about rent seeking, often with reckless abandon.
Rent seekers by their very nature have an enormous economic incentive to increase their take. Since they were the government, there were not the legal limits that usually are sufficient to muzzle political ambitions and pillage. But in poor countries, often taxes were not enough. The combination of socialist ideals and anti-colonial sentiment made foreign corporations a logical and natural target. The local assets of colonial corporations were nationalized by the score and the party faithful were given privileged positions running the companies.
The heady cocktail of government control, xenophobia, and incompetence was an economic disaster. After 20 years of independence many of these countries had not experienced any growth at all. Something else had to be tried.
What was tried was known as the Washington consensus. This was combination of policies that are painfully obvious, but are very hard for countries to swallow. The list includes fiscal discipline, the end to subsidies, tax reform, trade liberalization, encouragement of foreign direct investment, deregulation, privatization of state industries and protection of property rights. What is hard to swallow about these reforms is that they rescind many of the elites’ privileges and protected status. No one likes to lose economic power. For this reason reform in every country anywhere will meet massive resistance, regardless of whether the privileged are Wall Street bankers, French civil servants or Communist Chinese cadres. But these poor countries had little choice, so they reformed.
The economic revolution that took place starting in the early nineties was in many ways as dramatic as the earlier political ones. From the creation of special economic zones in Shenzhen, China, to the end of the License Raj in India, reforms spurred fantastic economic growth. Massive bureaucratic red tape was reduced; foreign investors were aggressively courted; state firms were sold off. In a few short years the third world became emerging markets. Their rapid economic growth was the envy of the sclerotic and debt-burdened developed world. They were on a trajectory of limitless growth. Or not.
Success always breeds arrogance. Emerging markets are no different. Economic reforms did not evolve into political reforms. The elites were still around and learned something very important. There was much more to steal in a successful economy than in an unsuccessful one. They began to understand it was much better to take a larger share of the income stream than the asset.
One of the most obvious areas is natural resources. Foreign capital and expertise are invariably necessary to coax riches from the ground, but recent high prices from the commodities boom have made profits from extraction irresistible. Demands for higher taxes and royalties are increasing in countries from Venezuela, and Argentina, to Indonesia and even Mongolia. Resource nationalism has replaced capital allocation as the number one concern of executives.
Nationalization may be passé, but confiscation is not. It is just done with more finesse. A former Indonesian general and potential presidential candidate was able to take over a giant coal deposit claim of a British company by alleging that lapsed licenses were still in force and had priority. When Russia wanted to muscle out Shell from its find off Sakhalin Island, they brought charges of environmental violations. The successful Russian oil company Yukos was stolen by a claim of unpaid taxes. The most recent Indian draft budget contains a retroactive tax aimed at Vodafone, the second largest telecom operator in India. The tax would reverse an Indian Supreme Court decision that should have settled the case. In China a prominent talk-show host wants to “throw out the foreign trash”. Foreign corporations are no longer considered necessary to economic growth and are not welcome.
Economists like to ascribe the miraculous growth of emerging markets to things like demographics which would make continued growth inevitable. It’s not. The rapid growth of emerging markets is only as strong as the laws that created the reforms and those laws are only written on paper.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected].)
Though there are no fingers pointed at anyone in particular in the $11 billion Rafale jet fighter deal, it certainly has strange connections and cross connections
There have been allegations that pressure from the highest political level, and possibly a huge under-the-table payment, dictated India's decision to plump for the Rafale jet fighter made by Dassault of France. The order is for 126 fighter-jets worth an immense $11 billion. These jets are meant to replace the country's ageing fleet of MiG 21s, which make up one-third of the Air force's jet fighters.
Collateral evidence has emerged, through research by Subramanian Swamy and our searches on Google and other internet sites, that blood relations and close friendships at the top political level probably tilted the scales in favour of the Rafale. There is as yet no evidence that Dassault paid a huge bribe to India's first family, though the possibility cannot be ruled out, given the current milieu in India.
It is a tangled skein and one end of the thread begins with T Anantha Krishnan, popularly called TAK. He is the son of a Sri Lankan Tamil immigrant, who was an indentured plantation worker.TAK was reputedly close to K Padbanabhan, money manager of the LTTE, who is now in jail in Sri Lanka.
TAK has no further role in this tale, except that his wife is Latchoumie Marie Helene, born to a white French father who belongs one of the ancient families of France and a Tamil mother. She is popularly known as Mme TAK and Latchoumie is probably the Frenchified version of Lakshmi, a common Tamil name...
Mme TAK, is the owner of La Fantaisie, a very big art gallery and auction house in Paris, which can be described as the Christie's of France. Carla Bruni, the Italian wife of Nicholas Sarkozy who was the French president when the Rafale deal was inked, is a partner in this venture for the past two years.
Mme TAK is also owner of a sophisticated music recording house in Paris. Carla, who is also a pop singer, uses Mme TAK's studios for registering and issuing her albums.
She counts among her good friends Sonia Gandhi, Rahul Gandhi and Sonia's sisters who frequently visit her in France and stay in her chateau. Rahul Gandhi stayed with her when he went to France in early 2012.
Mme TAK owns vineyards in northern Colombia with jointly with rich Colombian families called Bettancourt and Katalli. Rahul Gandhi's former live in girl-friend Veronique is connected to the Kattallis.
Now comes the interesting point. Mme TAK is one of the shareholders of Dassault.
Carla Bruni is Italian born. She is related by marriage to Sonia Gandhi: Carla is a cousin of Sonia Gandhi's sister's daughter-in-law.
Discussions are still going on between India's defence ministry and Dassault, particularly on the 'offset' condition under which around 50% of the aircraft will have to be built by Indian manufacturers.
A couple of months ago, Moneylife wrote on the choice of the Rafale. The headline of the story was "Look out, Mr Antony, Little Brother is watching you".
This is Little Brother signing off, till the next instalment.
R Vijayaraghavan has been a professional journalist for more than four decades, specialising in finance, business and politics. He conceived and helped to launch Business Line, the financial daily of The Hindu group. He can be contacted at [email protected]).
Equity mutual funds witness the highest net inflow since the start of the year in May
Equity mutual fund schemes saw a net inflow of Rs420 crore last month, according to data released by Association of Mutual Funds in India (AMFI). Though the inflow was not as much, it was higher than that reported for the month of March which saw a net inflow of Rs71 crore. This inflow has not helped much as for the first five months of the year there has been a total net outflow of Rs3,313 crore.
The market declined by nearly 8% in the month of May. The Sensex fell from a high of 17,300 to as low as 15,800 before picking up towards the end of May. The market had declined nearly as much for the same month the previous year as well, with the Sensex going down from 19,300 to 17,800. The total inflows then was as high as Rs1,478 crore. Sales for May 2011 had reached Rs5,988 crore, nearly double that of the sales last month which totalled just Rs3,343 crore.
The total inflow for the first five months of the previous year amounted to as much as Rs4,534 crore. This year has seen almost the same amount of outflow. Since the start of the year there have been just three new fund offers (NFOs) launched which brought in Rs57 crore, compared to last year where five NFOs were launched, bringing in as much as Rs405 crore. There was just one sector fund launched last month which brought in around Rs18 crore.
This month should see sales pick up as there are three equity-oriented NFOs which will be open for subscription. Axis Focused 25 will invest in just 25 stocks, IIFL Dividend Opportunities Index will invest in stocks closely following the CNX Dividend Opportunities Index while Baroda Pioneer Banking and Financial Services is a sector fund. There is also a hybrid scheme, Union KBC Asset Allocation Fund which will invest in equity, debt and gold. Read what we have to say about these funds below: